Raoul_Luke
I feel a bit lightheaded. Maybe you should drive.
That was investment banks, not maw and paw's savings accounts. And there's one other problem with your contention here - it isn't true:In 2003 the Bush administration changed the liquidity rules and allowed banks to borrow up to $40 for every $1 in deposits. The previous limit was $15::$1.
What could go wrong? The banks were using the money to buy up derivatives...if the value of those investments dropped just 3% the bank was insolvent. At the same time Bush's appointee to the SEC laid off about 150 people from enforcements and investigations. There was one person left in the Office of National Risk Assessment....
Bush signed Tarp. Other than that his efforts were all meant to kick the can down the road and get out of town before they got worse.
Although our understanding of what instigated the 2008 global financial crisis remains at best incomplete, there are a few widely agreed upon contributing factors. One of them is a 2004 rule change by the U.S. Securities and Exchange Commission that allowed investment banks to load up on leverage.
This disastrous decision has been cited by a host of prominent economists, including Princeton professor and former Federal Reserve Vice- Chairman Alan Blinder and Nobel laureate Joseph Stiglitz. It has even been immortalized in Hollywood, figuring into the dark financial narrative that propelled the Academy Award-winning film Inside Job.
As Blinder explained in a Jan. 24, 2009 New York Times op-ed piece, one of what he listed as six fundamental errors that led to the crisis came “when the SEC let securities firms increase their leverage sharply.” He continued: “Before then, leverage of 12 to 1 was typical; afterward, it shot up to more like 33 to 1. What were the SEC and the heads of the firms thinking?”
More recently, Simon Johnson, a former chief economist at the IMF, said last November that the decision “by the Bush administration, by the SEC to allow investment banks to massively increase their leverage … in terms of the big mistakes in financial history, that’s got to be in the top 10.”
It is certainly true that leverage at the investment banks zoomed between 2004 and 2007, before the near collapse. And this narrative of the rule change has plenty of appeal — it serves up villains. Stupid SEC people! Greedy bankers! It also suggests regulators were in the pockets of the big banks, and it offers support for the narrative of financial deregulation that many put at the center of the crisis.
There’s just one problem with this story line: It’s not true. Nor is it hard to prove that. Look at the historical leverage of the big five investment banks — Bear Stearns, Lehman Brothers, Merrill Lynch, Goldman Sachs and Morgan Stanley. The Government Accountability Office did just this in a July 2009 report and noted that three of the five firms had leverage ratios of 28 to 1 or greater at fiscal year-end 1998, which not only is a lot higher than 12 to 1 but also was higher than their leverage ratios at the end of 2006. So if leverage was higher before the rule change than it ever was afterward, how could the 2004 rule change have resulted in previously impermissible leverage?
http://blogs.reuters.com/bethany-mclean/2012/03/19/the-meltdown-explanation-that-melts-away/
It's a good read and I suggest anyone interested in the facts read the whole thing...